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2015 Review: Little Interest at the End of a Challenging Year
Despite U.S. equity market gains in late December, the year proved challenging for most asset classes. The S&P
500 index* finished up 1.38%. The MSCI International Equity Index * fell by -0.81%, and the MSCI Emerging
Markets Index* lost -15.41%. The Barclays Capital Aggregate Bond Index* eked out a positive return of 0.55%.
2015 Economic & Geo-Political Highlights:
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Domestically: energy prices (oil) plummeted by more than 35%, the U.S. economy grew, albeit sluggishly,
and the unemployment rate remained low. The Federal Reserve raised interest rates and the U.S. dollar
strengthened.
Internationally: China devalued their currency, Japan’s economic stimulus plan remained ineffective,
terrorists attacked Paris, and Russia increased its military presence in Syria while Europe opened its borders
to over a million refugees from war-stricken Syria.
Domestically
Although the US Economy expanded in 2015, equity markets remained volatile throughout most of the year.
Equities rallied to record highs in May and slumped during the summer. In December, after stronger than expected
employment data, the Federal Reserve raised the federal-funds rate by a quarter-point, increasing rates for the first
time since reducing rates to zero exactly seven years ago, on December 16, 2008. Federal Reserve Chair Janet
Yellen and the FOMC expect to continue an “accommodative” monetary policy and indicated their intentions to
raise rates several times throughout 2016.
Also in 2015, housing and building statistics remained positive, while the U.S. auto industry achieved its strongest
sales year since 2000.
What this means for you: The good news is that the economy continues to strengthen, more people are working,
and wages are up. Wages grew 2.5% in October alone, representing the biggest increase since July 2009. Higher
wages lead to consumer spending, which is the largest component of U.S. economic growth. MasterCard Advisor’s
data on holiday spending indicated that sales were up nearly 8% year over year. In 2016, we expect low
unemployment, subdued inflation, and continued positive wage pressure will all lead to sustained economic growth
in the U.S.
Energy and commodity prices plummeted to new lows. Brent crude, the benchmark for the oil industry, fell from a
high of $69.60 per barrel at the beginning of May, to a year-end low of $36.08. (As recently as August 2014, Brent
crude priced at $115 a barrel). One factor in the price of oil dropping was increased production. U.S. domestic oil
production practically doubled over the past six years, largely due to the fracking industry’s expansion. This
increased supply considerably, while at the same time OPEC made it clear they would maintain their present
production quota. Exacerbating this situation was the decreasing demand for oil from a softening Chinese economy,
as well as the end of oil sanctions on Iran meaning they could now resume exporting oil.
What this means for you: Oil production is becoming cheaper and that, along with excess supply, is resulting in
lower prices at the gas pump. The savings to motorists appears to be a further incentive to purchase new vehicles,
another positive for the U.S. economy as we enter 2016.
Globally
China
Chinese President Xi Jinping made a positive impression on many nations by visiting their leaders personally,
although the depth of goodwill was tempered by Beijing’s island building in the South China Sea. Despite
international demands to halt constructing the military facilities, the Chinese government showed no signs of
stopping this activity.
GDP declined to 7% in China, despite strong consumer spending, a strengthening service economy, and stabilization
of the real estate market. After declaring this as the “new normal”, the Chinese government revised the target down
further to 6.5% with some economists believing the real figure could be even lower.
The Chinese government responded swiftly to these economic challenges, providing immediate liquidity and fiscal
stimulus while postponing structural reforms in favor of maintaining near-full employment. In spite of their efforts,
the Chinese stock market dropped 30% over a two-week period. The government quickly intervened, halted trading
and loaned $42 billion (U.S. dollars) to firms for stock buy-backs. Less than a month later, Beijing devalued their
currency by 4% and the Chinese Yuan fell about 5.5% against the U.S. dollar in an effort to stimulate exports. In
August, the Shanghai stock market plummeted again, falling a further 7.6%. The actions and responses of China’s
economic leadership further exacerbated global equity and debt market volatility, calling into question their
competence and credibility regarding managing economic policies and overseeing market regulations.
While we anticipate continued market volatility in China over the coming months, we agree with a number of
economists who still predict a relatively soft landing for the Chinese economy, believing that the transformation
from a manufacturing-driven economy to a consumer-driven economy has yet to be fully appreciated by investors.
Europe
The European economy continues to recover. Inflation remained lower than expected however as consumers needed
more incentive to stop hoarding cash and spend more. Mario Draghi, the President of the European Central Bank
responded with policy reducing the deposit rate to -0.3%, which for consumers translates to paying fees to keep
money in a bank. The objectives of this policy are to discourage saving and stimulate spending. The European
migrant crisis continues to be a more immediate and major challenge to Europe and its leaders with more than a
million refugees flooding into Europe to escape conflicts in Syria and Afghanistan. German chancellor Angela
Merkel faced intense pressure from European politicians for her accommodating position regarding opening “border
doors” and accepting so many refugees.
Japan
Prime Minister Abe’s “Three Arrows” fiscal plan to revitalize Japan’s economy continued running out of steam.
Real wages have been inching higher but not fast enough to create sustained consumer confidence and stimulate
steady consumption. While the government may continue expanding their quantitative easing, Japan’s public debt
now stands at approximately 245% of GDP. Abe is limited in his fiscal and monetary choices as to how best to
reverse the situation and Japan may continue further into a recessionary period, finding 2016 even more challenging
than last year.
Summary
The U.S. economy grew during 2015. While the year’s GDP numbers are yet to be finalized, continuing signs are
positive regarding wages, spending, and economic expansion in general. We anticipate U.S. and global equity
market volatility to remain, at least in the near-term. Sound bites regarding the economy may become a little more
dramatic and facts may become a little more distorted with a Presidential election approaching.
Maintaining a long-term investment approach is important, especially during times of heightened market volatility.
We will continue adhering to the steps that truly generate successful financial planning; those of following a strict
process regarding asset allocation and rebalancing, communicating clearly with you, and continually and thoroughly
monitoring your financial situation to ensure together, we are getting you ever closer to your financial objectives.
We look forward to talking with you soon.
Sincerely,
TLA Wealth Advisory Team
*Indices mentioned are unmanaged and cannot be invested in directly. Past performance is not a guarantee of future
results.